In a speech in New York last month, Argentina’s president, Cristina Fernández Kirchner, announced a major change of stance on the bond hold-outs. She said the government was considering a proposed deal for the remaining $20 billion of defaulted bonds from the 2001 crisis. She said the terms of the proposals were more favourable to Argentina than those in the 2005 swap, which carried a 76% haircut.
A group of investment banks, representing holders of $10 billion of the defaulted bonds, put forward a proposal for a bond swap that could be seen as a win-win for the country and the hold-outs. Hedge funds are likely to benefit most as they will be able to sell an asset at 40% of face value that has been trading at 30%. There are three key terms the Argentine government must satisfy.
First, it must issue dollar-denominated discounts due in 2033. Second, it must pay interest accrued in discount bonds and not in cash, as was the case in 2005. Third, GDP warrants must be issued along with the new discounts (although the government will not make any retroactive payments on the warrants).
This third requirement could be crucial for Argentine investors. In the second quarter last year, the government reported impressive 7.5% year-on-year GDP growth and analysts expect the economy to expand by 6.95% in 2008.These figures show that the coupon payment on the dollar GDP warrants could be 5.47% over the next 15 months, so making them among the most attractive, although volatile, instruments in the market.
In return for these three clauses, the bondholders need to agree to the following commitment: that for every $1,000-worth of defaulted bonds that are tendered in the swap, they buy $250-worth of 10-year bonds – an offer that would enable the Argentine government to raise much-needed funds. Argentina must find $11.8 billion next year for debt servicing and a further $10.5 billion in 2010.
A recent tumble in grain prices and the failure of a law to increase consumer energy tariffs has pushed the government into a tight spot. This explains why the government suddenly came forward with a $6.9 billion Paris Club deal using central bank reserves, and also goes a long way towards explaining the re-emergence of hold-out talks after three quiet years. With the hold-out issue lingering, Argentina is unable to enter the international markets. The government needs money; the problem is that the holders of the defaulted bonds know this.
The other half of the outstanding bonds are, in the majority, held by two groups of investors: Afta (American task force Argentina) and TFA (the Italian branch of Task Force Argentina). These two groups said the government would need to come forward with a much more attractive offer for them to participate in the swap. They have already made it clear they will not accept the terms on the table, as it is worse than the offer in 2005.
In response officials have cited a clause in the initial 2005 deal that prevents the government from making a better restructuring offer in the future. But the hold-out groups retort that Congress needs to vote on any reopening of the hold-outs, so why not vote on this change at the same time. Stalemate ensues.